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CASH MANAGEMENT

Qualifications and Credit Framework

AQ2013 Level 4 Diploma in Accounting

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British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library. Published by Kaplan Publishing UK Unit 2, The Business Centre Molly Millars Lane Wokingham Berkshire RG41 2QZ ISBN: 978-1-78415-403-5 The text in this material and any others made available by any Kaplan Group company does not amount to advice on a particular matter and should not be taken as such. No reliance should be placed on the content as the basis for any investment or other decision or in connection with any advice given to third parties. Please consult your appropriate professional adviser as necessary. Kaplan Publishing Limited and all other Kaplan group companies expressly disclaim all liability to any person in respect of any losses or other claims, whether direct, indirect, incidental, consequential or otherwise arising in relation to the use of such materials. © Kaplan Financial Limited, 2015 Printed and bound in Great Britain. We are grateful to the Association of Accounting Technicians for permission to reproduce past assessment materials and example tasks based on the new syllabus. The solutions to past answers and similar activities in the style of the new syllabus have been prepared by Kaplan Publishing. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of Kaplan Publishing.

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CONTENTS Introduction v

Unit guide vii

The assessment xxiii

Study skills xxv

Terminology for CSHM xxix

STUDY TEXT AND WORKBOOK

Chapter

Study text Workbook Activities Answers

1 Cash and profit

1 277

2 Forecasting cash flows

33 278

3 Patterns of cash flow

79 280

4 Preparing cash budgets

107 282

5 Monitoring cash flows

153 290

6 Liquidity management

169 291

7 Raising finance

193 292

8 Managing surplus funds

225 294

9 Assumed knowledge

255 n/a

Mock Assessment Questions

299

Mock Assessment Answers

315

Glossary

325

Index I.1

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INTRODUCTION

HOW TO USE THESE MATERIALS

These Kaplan Publishing learning materials have been carefully designed to make your learning experience as easy as possible and to give you the best chance of success in your AAT assessments.

They contain a number of features to help you in the study process.

The sections on the Unit Guide, the Assessment and Study Skills should be read before you commence your studies.

They are designed to familiarise you with the nature and content of the assessment and to give you tips on how best to approach your studies.

STUDY TEXT

This Study Text has been specially prepared for the revised AAT qualification introduced in September 2013.

It is written in a practical and interactive style:

• key terms and concepts are clearly defined

• all topics are illustrated with practical examples with clearly worked solutions based on sample tasks provided by the AAT in the new examining style

• frequent activities throughout the chapters ensure that what you have learnt is regularly reinforced

• ‘pitfalls’ and ‘examination tips’ help you avoid commonly made mistakes and help you focus on what is required to perform well in your examination

• practice workbook activities can be completed at the end of each chapter.

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WORKBOOK

The workbook comprises:

Practice activities at the end of each chapter with solutions at the end of this text, to reinforce the work covered in each chapter.

The questions are divided into their relevant chapters and students may either attempt these questions as they work through the textbook, or leave some or all of these until they have completed the textbook as a final revision of what they have studied

ICONS

The study chapters include the following icons throughout.

They are designed to assist you in your studies by identifying key definitions and the points at which you can test yourself on the knowledge gained.

Definition

These sections explain important areas of knowledge which must be understood and reproduced in an assessment.

Example

The illustrative examples can be used to help develop an understanding of topics before attempting the activity exercises.

Activity

These are exercises which give the opportunity to assess your understanding of all the assessment areas.

Quality and accuracy are of the utmost importance to us so if you spot an error in any of our products, please send an email to [email protected] with full details.

Our Quality Co-ordinator will work with our technical team to verify the error and take action to ensure it is corrected in future editions.

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UNIT GUIDE Cash management covers both knowledge and skills

Principles of Cash Management (Knowledge)

2 credits

Cash Management (Skills)

3 credits

Purpose of the units

Organisations that fail to manage their liquid resources appropriately expose themselves to a higher risk of failure than organisations that effectively manage their liquid resources. This unit is designed to equip accounting technicians not only with an understanding of the theoretical principles of good cash management but also with associated practical skill.

These skills include being able to extract relevant data from a range of sources to forecast income and expenditure and to use these forecasts, together with information on expected payment patterns, to undertake the preparation and revision of cash budgets. It is important that students can also analyse a range of information on borrowing and investing options and make appropriate recommendations to management which adhere to organisational policy.

Learning objectives

On completion of this unit the learner will be able to:

• Use statistical techniques and financial information to prepare forecasts of information

• Prepare cash budgets

• Use cash budgets to monitor cash flow within the organisation

• Manage cash balances effectively

• Raise finance in accordance with organisational requirements

• Invest surplus funds observing organisational policies

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Learning outcomes and Assessment criteria

The unit consists of six learning outcomes which are further broken down into Assessment criteria. These are set out in the following table with Learning outcomes in bold type and Assessment criteria listed underneath each Learning outcome. A K indicates a knowledge criteria and an S indicates a skill criteria. Reference is also made to the relevant chapter within the text.

To perform this unit effectively you will need to know and understand the following:

Chapter

1 Use statistical techniques and financial information to prepare forecasts of income and expenditure

1.1K Explain how recording and accounting practice may vary in different parts of an organisation

1

1.2S Prepare forecasts of income and expenditure using these statistical techniques:

• moving averages

• allowance for inflation

• regression analysis

2

1.3K Describe the relationship between cash flow and accounting for income and expenditure

1

1.4S Ensure forecasts of future cash payments and receipts agree with known income and expenditure trends

2

2 Prepare cash budgets

2.1K Identify the characteristics of the main types of cash receipts and payments

1

2.2S Estimate cash flows over the accounting period, and anticipate any exceptional receipts or payments

3, 4

2.3K Explain the effect of lagged receipts and payments upon an organisation’s cash management

3

2.4S Prepare cash budgets in accordance with the organisation’s preferred format and clearly indicate net cash requirements

4

2.5S Undertake sensitivity analysis on elements with the cash budget and quantify the effects of possible

4

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Chapter

changes in assumptions

3 Use cash budgets to monitor cash flow within the organisation

3.1S Monitor cash receipts and payments against budgeted cash flow

5

3.2S Identify significant deviations from the cash budget and take corrective action within organisational policies

5

4 Manage cash balances effectively

4.1K Explain how government monetary policies affect an organisation’s treasury functions

6

4.2K Identify the principles of liquidity management 6

4.3K Describe how an organisation’s principles of cash management will be determined by their specific financial regulations, guidelines and security procedures

6

4.4K Identify statutory and other regulations relating to the management of cash balances in different types of organisations

6

4.5S Take account of trends in the economic and financial environment in managing cash balances

7

4.6S Observe the organisation’s financial regulations and security procedures

7

4.7S Manage cash, overdrafts and loans in order to maintain an adequate level of liquidity in line with cash forecasts

7

5 Raise finance in accordance with organisational requirements

5.1K Explain how an organisation can raise finance and the basic terms and conditions associated with each of these types of financing

7

5.2S Anticipate cash requirements and arrange overdrafts and loans on the most favourable terms available

7

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Chapter

6 Invest surplus funds observing organisational policies

6.1S Assess different types of investment and the risks, terms and conditions associated with them

8

6.2S Analyse ways to manage risk when investing, to minimise potential losses to the organisation

8

6.3S Invest surplus funds according to organisational policy and with defined authorisation limits

8

Delivery guidance

This section provides detailed delivery guidance covering assessable topics and the depth and breadth to which these topics should be taught and learnt. The examples given of possible assessment tasks for each topic area are to provide guidance on the sort of tasks that students may be required to undertake but should not be considered as an exhaustive list. Task types include multiple choice, drag and drop, linked boxes, pick lists gap fill, and written tasks where students have an opportunity to provide evidence of their knowledge. Clear instructions are provided for each task and students should ensure that they follow these carefully.

The term cash in this unit is used to include bank accounts as well as coins and notes and cash payments include cheque payments, BACS, direct debits and standing orders.

The effective management of cash is not something that can be undertaken in isolation or without an awareness of the general financial environment in which organisations operate. Therefore it is important that students have a basic awareness of how the banking sector is structured, the relationship between different financial institutions and understand that legal relationships exist between lenders and borrowers.

Students should also be introduced to the sort of financial terminology which they could encounter in the workplace such as fixed and floating charges, brokers, term loans, maturity date, loan principal, annual percentage rates and money markets. These and other financial terms may be used in assessment tasks however students will only be expected to display knowledge or understanding of terms that are specifically noted in the delivery guidance and standards as assessable. The use of other terms will simply be to add reality to a task and the ability to undertake the task in a competent manner will not depend upon any detailed knowledge of such terminology.

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Assessment tasks may relate to a range of different organisations including sole traders, partnerships and limited companies. Students will not be expected to have any prior knowledge of the structure or accounting regulations of these organisations as they will simply be used as a background setting to enable assessment. Receipts and payments that might be organisation specific – for example, corporation tax, dividends received, dividends paid – could be used in tasks but students will simply be required to treat these cash flows in accordance with the instructions in the assessment data. However students will be expected to understand the format of a statement of profit or loss (income statement) and a statement of financial position and accounting adjustments such as accruals, prepayments, depreciation and irrecoverable debts.

Cash receipts and payments and their relationship with profit (LO1, LO2)

Assessment criteria:

1.1K Explain how recording and accounting practice may vary in different parts of an organisation

1.3K Describe the relationship between cash flow accounting and accounting for income and expenditure

2.1K Identify the characteristics of the main types of cash receipts and payments

Although this unit is primarily concerned with cash flows for an organisation students need to understand how cash flow accounting relates to accounting profits and losses. Transactions may be recorded in different ways in different parts of an organisation and therefore accounting technicians may be required to use a range of different sources of information to determine appropriate forecasts of income and expenditure. This could include financial statements (statement of profit or loss (income statement) and statement of financial position), management reports, production information and budgets).

Financial statements are prepared using accounting adjustments such as accruals, prepayments, provisions and depreciation and therefore does not show the cash flow of an organisation. Knowledge of how figures from financial accounting statements can be adjusted to reverse the effect of accounting adjustments and thereby find the cash transactions to be included in a cash budget is essential.

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Cash receipts and payments can be categorised in a number of ways according to their main characteristics. It is important to recognise the impact that each of these different types of receipts and payments has on the cash flow of an organisation and their differing patterns of cash flow. A cash budget needs to recognise different types of receipts and payments.

Statements of cash flows prepared under FRS1 and IAS7 format are not assessable in this Unit.

Assessment tasks may include:

• Identifying the characteristics of different types of cash receipts and cash payments and explaining their impact on cash flow (including regular, exceptional, capital, drawings, disbursements).

• Explaining how recording and accounting practices may vary in different parts of the organisation resulting in a variety of sources of information being available for determining likely patterns of cash flow.

• Deriving cash receipts and cash payments for a period from a range of given information whilst adjusting for accruals, prepayments and provisions. Information may be supplied in the form of financial statements, management reports, production information, budgets, ledger accounts and narrative, and may include information for more than one period.

• Explaining and demonstrating the impact of non-cash items e.g. depreciation on the cash flow of an organisation.

• Calculating the proceeds from or payments for non-current asset transactions. This may include using cost and accumulated depreciation or carrying amount, calculating or using a depreciation charge, dealing with disposals, splitting out additions paid for by cash with those made under finance leases.

• Using forecast information to reconcile operating profit with changes in cash including changes in equity, loans and tax.

• Using information provided in financial statements and narrative to determine the net change in cash position from the operating profit and reconcile the actual cash position to the forecast cash position.

• Creating an income statement from various financial records including extracts from summary bank statements and the trial balance. This will derive the income statement from the cash movements and the opening and closing balances.

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Forecasting income and expenditure (LO1)


1.2S Prepare forecasts of income and expenditure using these statistical techniques: moving averages; allowance for inflation; regression analysis (least squares regression analysis will not be tested).

1.4S Ensure forecasts of future cash payments and receipts agree with known income and expenditure trends

Known income and expenditure trends must be considered and incorporated into estimates of future cash receipts and payments that are to be included in a cash budget. Students will be required to use a range of statistical techniques to forecast income and expenditure, and use these forecasts to determine future cash payments and receipts.


• Using moving averages to identify the basic trend of income or expenditure. Calculations may be based on odd or even points so students must understand and be able to calculate centred averages.

• Calculating seasonal variations (both additive and multiplicative).

• Using the trend and the seasonal variations to forecast income or expenditure.

• Forecasting future income and expenditure making allowances for inflation using percentage increases and index numbers. Calculating price and index numbers from a range of information given and calculation of the price at the start of the index. Compounding is assessable here as well as calculating percentage increases and decreases over time. The creation of an index from historical figures is also assessable.

• Using regression analysis to forecast income and expenditure. Students will not be assessed on the derivation of the regression equation using the least squares formula but they will need to know the generic equation y = a + bx where y is the sales forecast and x is the time period (a and b will be constants).

• Forecasting sales and purchases using mark up and margin.

• Using forecast income and expenditure to forecast future cash receipts and payments.

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Patterns of cash flows (LO2)


2.2S Estimate cash flows over the accounting period and anticipate any exceptional receipts or payments

2.3K Explain the effects of lagged receipts and payments upon an organisation’s cash management

The preparation of a cash budget relies on identifying the expected payment patterns for receipts and payments accounting for differences in timings arising from selling or purchasing goods and services on credit terms and on cash terms and deposits made in advance.

• Using information obtained from a range of sources within an organisation to determine the likely pattern of different types of cash receipts and cash payments for inclusion in a cash budget. Given the potential impact of exceptional receipts and payments on the cash position of an organisation, these types of cash flows should be anticipated to ensure that they are included in the cash budget in the correct period so that their likely effect can be assessed.

• Mark up and/or margin could be assessed in this task to determine either sales prices or purchase prices and this could well lead into calculating the expected cash receipts and/or cash payments.

• Calculating the likely value of cash receipts for a number of periods using a range of information including the split of cash and credit sales, the expected pattern of receipts, expected sales volume and selling prices and opening receivables, and irrecoverable debts. Closing receivables, closing irrecoverable debts and discounts offered values or percentages may also have to be calculated.

• Calculating the likely value of cash payments for a number of periods using a range of information including the split of cash and credit purchases, different classes of expenditure such as materials, labour, overheads, capital purchases made by instalments and opening payables. Closing payables and discounts taken may also have to be calculated.

• Explaining the effect of lagging on the cash flow of a new business and an existing business.

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Preparing cash budgets (LO2)


2.2S Estimate cash flows over the accounting period and anticipate any exceptional receipts or payments

2.4S Prepare cash budgets in accordance with the organisation’s preferred format and clearly indicate net cash requirements

2.5S Undertake sensitivity analysis on elements within the cash budget and quantify the effects of possible changes in assumptions

Cash budgets provide decision makers with an effective tool for cash management therefore students who are able to accurately prepare a cash budget from a variety of information will be equipped with a valuable practical skill.

The preparation of a cash budget will necessarily require students to use a range of information presented in a variety of ways depending upon the nature of the organisation and its activities. At this level students will be expected to be able to extract information from data that is presented in different ways.

Cash budgets do not have a statutory format and organisations may choose to present information in different ways. The assessment will use the following format:

• Analysis of sources of receipts leading to total receipts for the period

• Analysis of the sources of payments leading to total payments for the period

• Net cash flow for the period

• Opening cash balance

• Closing cash balance

Cash budgets are prepared using assumptions about the nature of cash flows. It is important to understand that net cash requirements will be affected by changes in those assumptions and that revised cash budgets will need to be prepared. Students must be able to quantify effects by value or by percentage.


• Calculating sales receipts for inclusion in a cash budget after accounting for early settlement discounts, sales price fluctuations, irrecoverable debts and the effect of lagging.

• Calculating purchase payments for inclusion in a cash budget after accounting for early settlement discounts, purchase price fluctuations and the effect of lagging.

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• Calculating other receipts and other payments for inclusion in the cash budget from a variety of information incorporating given payment patterns.

• Calculating VAT payments or refunds based on information provided for sales and purchases. All VAT will be standard rated only; there will be no inclusion of any complexities such as differing VAT rates, cash accounting for VAT or the Flat Rate Scheme.

• Calculating the sterling value of a receipt or payment when the amount in a foreign currency is known. An appropriate exchange rate will be given.

• Preparing a cash budget for at least two periods for a new or an existing organisation, clearly indicating the net cash position at the end of each period. Cash budget figures should be rounded to whole £’s following normal rounding conventions.

• Calculating and incorporating bank interest received and bank interest paid into a cash budget, as well as loan principal payments, bank loan interest and overdraft interest.

• Incorporating receipts and payments into a cash budget.

• Quantifying the effects of changes in volume, price and timing.

• Quantifying the effects of suppliers enforcing payments in line with contractual terms where payment terms have slipped or deviated.

• Quantifying whether discounts for early settlement should be accepted or offered.

• Quantifying the effect of special offers for purchasing early or using substitute materials or labour.

• Preparing revised cash budgets to account for changes in original assumptions.

• Explain or quantify the impact on cash flow of decisions to increase or decrease inventory levels.

Monitoring cash flows (LO3)


3.1S Monitor cash receipts and payments against budgeted cash flow

3.2S Identify significant deviations from the cash budget and take corrective action within organisational policies

In addition to being a tool for predicting cash shortfalls and cash surpluses, a cash budget can be used to monitor and control cash inflows and outflows. Cash management is not simply about being able to prepare a cash budget it also involves being able to analyse significant deviations from budget offering explanations and suggesting possible courses of action to prevent recurrence.

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• Identifying significant deviations between actual and budgeted cash flows in line with organisational policy.

• Analysing the causes of significant deviations from budget accounting for information supplied.

• Suggesting corrective action for significant deviations having regard to the impact of such actions on the cash position of the organisation and on organisational policies. Ensure that possible courses of action are matched with the nature and cause of the variances.

• Identifying and explaining which variance(s) have had the greatest impact on the budgeted results.

• Discussing the inherent problems of forecasting figures and the strengths and weaknesses of cash budgets as a tool for monitoring and controlling cash flows.

Liquidity management (LO4)

Assessment criteria

4.1K Explain how government monetary policies affect an organisations treasury functions

4.2K Identify the principles of liquidity management

4.3K Describe how an organisation’s principles of cash management will be determined by their specific financial regulations, guidelines and security procedures

4.4K Identify statutory and other regulations relating to the management of cash balances in different types of organisations

Adequate liquidity is the key factor in contributing to the success or failure of trading organisations. Students need to understand that cash is part of the working capital of the business and that the time taken to convert inventory, trade receivables and trade payables into cash affects the liquidity position of the organisation. Liquidity management involves monitoring cash flows through the working capital cycle, understanding that different types of cash flows have different timing patterns, using cash budgets to forecast and monitor the organisation’s liquidity position, arranging finance to cover expected cash shortfalls and investing cash surpluses to achieve maximum returns. In short, to ensure that an organisation has access to sufficient funds to meet their liabilities as and when they fall due. In addition management should be able to recognise the indicators of possible future liquidity problems which include overtrading.

Students should also understand the role of the government in setting monetary policies to control the supply of money.

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• Explaining the purpose and elements of liquidity management.

• Explaining the working capital cycle/cash operating cycle and its relationship to liquidity management. Students will be expected to calculate the cash operating cycle from information given. When calculating trade payable days it is usual to use the cost of sales figure, however this is a rough approximation of the total purchases on credit. However if there are figures given for total purchases on credit or cost of sales and total purchases for cash then students should use the total purchases on credit when calculating trade payable days.

• Calculating liquidity ratios and using them to calculate the length of the cash operating cycle.

• Recognising generally accepted signs of overtrading (rapidly increasing sales linked to rapidly increasing trade receivables often with customers taking longer to pay and increases in irrecoverable debts, and also inventory increases in anticipation of future sales increases. These increases put added strain on the cash flow of the business as cash is tied up in inventory and receivables. The large increase in inventory and receivables is often funded by an increase in trade payables and increased use of a bank overdraft which will add to future cash flow issues when overdraft interest is paid); suggesting actions to reduce the risk of overtrading; explaining the impact of overtrading on liquidity management.

• Demonstrating an awareness of statutory and other organisational regulations and guidelines that relate to the management of cash balances. Students must be aware that some organisations are governed by mandatory regulations that need to be adhered to e.g. limited companies through the Companies Act are required to maintain proper accounting records and that directors have a fiduciary duty of care, and public sector organisations follow guidelines issued by HM Treasury.

• Explaining the ‘treasury function’.

• Explaining how the government’s monetary policy in controlling the supply of money in the economy, and the effect of this on the rate of inflation, economic activity (GDP growth and attempting to avoid recession) and interest rates, impacts an organisations treasury function. This includes an understanding of the principles of quantitative easing and explaining the role of the Bank of England in influencing interest rates.

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Raising finance (LO4, 5)



4.6S Observe the organisation’s financial regulations and security procedures

4.7S Manage cash, overdrafts and loans in order to maintain an adequate level of liquidity in line with cash forecasts

5.1K Explain how an organisation can raise finance and the basic terms and conditions associated with each of these types of financing

5.2S Anticipate cash requirements and arrange overdrafts and loans on the most favourable terms available

A cash budget is one method that an organisation can use to anticipate future cash shortages based on their forecast activities. A cash budget provides a periodic forecast of net cash positions that will enable management to select and arrange suitable financing options to cover any cash shortages.

Organisations can raise finance from a range of sources including bank loans and overdrafts, operating and finance leases, sale and leaseback, HP agreements, loan stock, bonds, equity and preference shares, factoring and invoice discounting. Students need to understand that all financing options have differing terms and conditions attached to them and that there are a number of factors that need to be considered before recommending a suitable form of finance. Different organisations may have established regulations, policies and guidelines governing the sources of, and terms under which, finance can be raised. An important point to recognise is that those charged with liquidity management owe a duty of care to the owners of the organisation either as a fiduciary or under an employment contract.


• Explaining the main features, terms and conditions associated with bank overdrafts and loans, leases (including risks and rewards of ownership), equity and debt funding and bonds including availability, interest rates (fixed, variable and capped), fees, time period, repayment structure, security (mortgage, personal guarantee, fixed and floating charges), default, advantages and disadvantages.

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• Students may be tested on their knowledge of finance leases and operating leases and the difference in the accounting treatment in the financial statements and how the leases will affect the gearing. The gearing ratio used in any assessment will be:

100equity+debt Total

term) long+term (short debt Total ×

• Making justified recommendations of ways to finance given cash requirements. Recommendations should consider the possibility of combining different types of financing options to maintain an adequate level of liquidity at the lowest possible cost or the most favourable impact on cash flow having regard to the organisation’s own guidelines and regulations.

• Calculating the costs associated with different forms of borrowing, including different types of interest. Flat rate interest is when the interest rate is calculated based on the loan principal. It is applied to the whole of the loan every year and does not take into account any repayments. For this reason the flat rate of interest can seem to be the lower option but in reality can be quite expensive. Calculating the simple interest on a loan or investment. The simple interest rate can be calculated by taking the total interest as a percentage of the original principal. Calculating interest charged from the loan term and repayments.

• Explaining the purpose and mechanics of annual percentage rate (APR) and how it is calculated on the amount of loan principal outstanding so that the interest charge reduces each time a repayment is made by the borrower. This means that the actual interest charged each month reduces in line with the reduction in the principal. Calculation of APR is not assessable.

• Explaining the importance of adhering to statutory regulations such as the Companies Act and public sector regulations as well as organisational policies when raising finance.

• Selecting the most appropriate borrowing having regard to the economic and financial environment.

• Explaining and calculating the impact of borrowing on gearing/credit rating and the concept of loan to value.

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Managing surplus funds (LO4, 6)



6.1S Assess different types of investment and the risks, terms and conditions associated with them

6.2S Analyse ways to manage risk when investing, to minimise potential losses to the organisation

6.3S Invest surplus funds according to organisational policy and within defined authorisation limits

As well as being able to select suitable finance for dealing with cash shortages organisations need to utilise cash surpluses in the most appropriate manner to ensure that they receive acceptable return for acceptable risk. This may include repaying loans early or taking advantage of early settlement discounts which would offer a greater saving to the business than various investment opportunities Different organisations have different regulations and guidelines governing investment and students must take these into account when making recommendations. Investment options may include: property, land, shares (equity and preference, listed and private), bonds, gilts, money market accounts, treasury bills, deposit accounts, notice accounts, Certificates of Deposit (CD’s), and gold or other commodities.


• Explaining the main features, terms and conditions associated with different types of investments including availability, interest rates (fixed, variable and capped), fees/transaction charges, time period, liquidity, risk, advantages and disadvantages.

• Understand that when investing surplus funds the risk, reward and liquidity of the investment needs to be taken into account. In addition to this the portfolio effect will need to be considered where the diversification of investment into a number of options provides a balance of risk reward and liquidity and could create a better return than putting all their eggs into one basket.

• Understanding that different organisations will have their own financial regulations, guidelines and security procedures that must be observed when considering possible courses of action and making recommendations. Describing how these regulations, guidelines and procedures affect the organisations principles of cash management and the typical contents of an organisational policy.

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• Identifying ways that an organisation could manage risk and exposure when investing surplus funds to try and ensure that potential losses are minimised and explaining the terms risk averse and risk seeking.

• Analysing the risk and return of different investment options.

• Assimilating a range of information and analysing the suitability of different investment options and making recommendations for investing surplus funds having regard to the organisation’s policies and procedures, internal regulations, attitude towards risk, return, termination costs, realisation/maturity, authorisation limits and the economic and financial environment.

• Calculating the return on investments incorporating early cash-in penalties and bonus interest rates, dividend yield, yields on gilts. Identifying sums to be invested to achieve a specific return.

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THE ASSESSMENT

The format of the assessment

The assessment will be divided into ten standalone tasks which cover all of the learning outcomes and assessment criteria. Three of the tasks will require free text responses and will be human marked. The remaining seven tasks will be computer marked.

Task Learning outcome

Assessment criteria

Maximum marks

Title for topics within task range

1 1, 2 1.1K

1.3K

2.1K

12 Cash receipts and payments and their relationship with profit

2 1 1.2S

1.4S

14 Forecasting income and expenditure

3 2 2.2S

2.3K

14 Patterns of cash flow

4 2 2.2S

2.4S

16 Preparing a cash budget

5 2 2.5S 16 Sensitivity analysis

6 3 3.1S

3.2S

12 Monitoring cash flows

7 4 4.1K

4.2K

4.3K

4.4K

12 Liquidity management

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Task Learning outcome

Assessment criteria

Maximum marks

Title for topics within task range

8 4, 5, 6 4.5S

5.2S

6.1S

12 Saving and borrowing – terms, conditions and calculations

9 4, 5 4.5S

4.6S

4.7S

5.1K

5.2S

16 Raising finance

10 6 6.1S

6.2S

6.3S

12 Investing surplus funds

Time allowed

The time allowed for this assessment is 2 hours 30 minutes.

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STUDY SKILLS

Preparing to study

Devise a study plan

Determine which times of the week you will study.

Split these times into sessions of at least one hour for study of new material. Any shorter periods could be used for revision or practice.

Put the times you plan to study onto a study plan for the weeks from now until the assessment and set yourself targets for each period of study – in your sessions make sure you cover the whole course, activities and the associated questions in the workbook at the back of the manual.

If you are studying more than one unit at a time, try to vary your subjects as this can help to keep you interested and see subjects as part of wider knowledge.

When working through your course, compare your progress with your plan and, if necessary, re-plan your work (perhaps including extra sessions) or, if you are ahead, do some extra revision/practice questions.

Effective studying

Active reading

You are not expected to learn the text by rote, rather, you must understand what you are reading and be able to use it to pass the assessment and develop good practice.

A good technique is to use SQ3Rs – Survey, Question, Read, Recall, Review:

1 Survey the chapter

Look at the headings and read the introduction, knowledge, skills and content, so as to get an overview of what the chapter deals with.

2 Question

Whilst undertaking the survey ask yourself the questions you hope the chapter will answer for you.

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3 Read

Read through the chapter thoroughly working through the activities and, at the end, making sure that you can meet the learning objectives highlighted on the first page.

4 Recall

At the end of each section and at the end of the chapter, try to recall the main ideas of the section/chapter without referring to the text. This is best done after short break of a couple of minutes after the reading stage.

5 Review

Check that your recall notes are correct.

You may also find it helpful to re-read the chapter to try and see the topic(s) it deals with as a whole.

Note taking

Taking notes is a useful way of learning, but do not simply copy out the text.

The notes must:

• be in your own words

• be concise

• cover the key points

• well organised

• be modified as you study further chapters in this text or in related ones.

Trying to summarise a chapter without referring to the text can be a useful way of determining which areas you know and which you don’t.

Three ways of taking notes

1 Summarise the key points of a chapter

2 Make linear notes

A list of headings, subdivided with sub-headings listing the key points.

If you use linear notes, you can use different colours to highlight key points and keep topic areas together.

Use plenty of space to make your notes easy to use.

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3 Try a diagrammatic form

The most common of which is a mind map.

To make a mind map, put the main heading in the centre of the paper and put a circle around it.

Draw lines radiating from this to the main sub-headings which again have circles around them.

Continue the process from the sub-headings to sub-sub-headings.

Highlighting and underlining

You may find it useful to underline or highlight key points in your study text – but do be selective.

You may also wish to make notes in the margins.

Revision phase

Kaplan has produced material specifically designed for your final examination preparation for this unit.

These include pocket revision notes and a bank of revision questions specifically in the style of the new syllabus.

Further guidance on how to approach the final stage of your studies is given in these materials.

Further reading

In addition to this text, you should also read the ‘Student section’ of the ‘Accounting Technician’ magazine every month to keep abreast of any guidance from the examiners.

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TERMINOLOGY FOR CSHM There are different terms used to mean the same thing – you will need to be aware of both sets of terminology.

UK GAAP IAS

Final accounts Financial statements

Trading and profit and loss account Statement of profit or loss or Income Statement

Turnover or Sales Revenue or Sales revenue

Balance sheet Statement of financial position

Fixed assets Non-current assets

Net book value Carrying amount

Tangible assets Property, plant and equipment

Stock Inventory

Trade debtors Trade receivables

Trade creditors Trade payables

Long term liabilities Non-current liabilities

Capital Equity

Profit and loss balance Retained earnings

Net profit Profit for the year

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Introduction

This chapter demonstrates how important cash is to a business. It looks at how cash differs from profit.

ASSESSMENT CRITERIA

Explain how recording and accounting practice may vary in different parts of an organisation (1.1K)

Describe the relationship between cash flow accounting and accounting for income and expenditure (1.3K)

Identify the characteristics of the main types of cash receipts and payments (2.1K)

CONTENTS

1 Types of cash flow

2 Cash flow versus profit

3 Calculating cash flows

4 Reconciling profit to cash flow

Cash and profit

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1 Types of cash flow

1.1 The importance of cash flow

The term cash in this unit is used to describe bank account balances as well as coins and notes; and cash payments include cheque payments, BACS, direct debits and standing orders.

Any business will wish to make a profit. This means that, over a period of time, revenue needs to exceed costs. However, even if the business is making a profit, it must also have cash funds available to pay suppliers, employees and other expenses.

1.2 Types of cash flow

There are different types of cash flow that a business is likely to have:

• Regular receipts and payments such as sales, purchases and expenses.

• Receipts and payments of a long-term nature, known as capital receipts and payments, such as the raising of share capital or the purchase of non-current assets.

• Payments made to the owners of a business either in the form of drawings for a sole trader or partnership or dividends for a company.

• Other costs such as the payment of taxes to the government.

• Unusual or exceptional receipts or payments, for example, cash received from the sale of a non-current asset.

A business will have different types of receipts and payments. The typical types of cash flows that you will come across are described below.

1.3 Cash inflows

• Regular revenue receipts for a business will be cash sales and cash from customers that have purchased goods on credit.

• Capital receipts will include cash raised by issuing shares or raising a loan.

• Other types of capital cash inflow such as the proceeds from the sale of non-current assets or the receipt of government grants. These are likely to be irregular cash inflows.

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1.4 Cash outflows

• Regular revenue payments will include payments for cash purchases, cash paid to payables, wage payments, payment of bills, and cash payments of expenses.

• Capital payments could include the repayment of loans or the purchase of non-current assets. When new non-current assets are purchased this may be for a large sum on just one date or it may take the form of regular payments if, for example, the asset is acquired under a lease or hire purchase agreement.

• Businesses will also be likely to make payments or disbursements in the form of corporation tax, VAT and PAYE. These may be regular such as the monthly PAYE payments or one-off payments each year such as the annual payment of corporation tax.

• Payments will also be made to providers of finance such as dividends to shareholders and interest payments to banks and other providers of finance. The timing of these payments will vary but, for example, companies usually pay any dividend twice a year, a small interim dividend during the year and a larger final dividend after the year end.

• Finally, in a sole trader’s business or a partnership, there may be either regular or irregular payments made to the owner or partners in the form of drawings.

1.5 Exceptional cash flows

The cash flows described above are the normal, everyday types of cash flows that most businesses will have. However in some cases there will also be exceptional cash flows which are not part of normal business operations.

• Exceptional cash outflows might include payment of legal damages or redundancy costs.

• Exceptional cash inflows might include items such as receipts from an insurance company for damaged inventory.

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Activity 1

Cash receipts and payments take many different forms but they can be broadly categorised into regular, capital, exceptional and drawings.

Complete the table by selecting the correct description from the list of options below to match the type of cash receipt or cash payment (not all options need to be used).

Type of receipt or payment Description

Capital receipts

Capital payment

Regular revenue receipt

Exceptional payment

Exceptional receipt

Regular revenue payment

Annual disbursement

Drawings

Options:

A Payment of electricity bill

B Receipt from an insurance claim

C Proceeds from the disposal of non-current assets

D Payments made to the owners of the business

E Lease new machinery

F Pay corporation tax for the year

G Payment of a redundancy package

H Customer paying their debt

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Activity 2

Payments that relate to the purchase of non-current assets would be classified as:

A Capital payments

B Regular revenue receipts

C Drawings

D Exceptional receipts

Activity 3

Income received from an insurance claim for lost inventory would be classified as:

A Capital payments

B Regular revenue receipts

C Drawings

D Exceptional receipts

2 Cash flow versus profit

2.1 Cash flow and profit

Cash is not the same as profit. It is entirely possible for a profitable business to run short of cash.

• Profit is a figure on the Statement of Profit or Loss

• Cash is a current asset on the Statement of Financial Position

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A typical Statement of Profit or Loss is shown below:

£000 Revenue X Cost of sales (X) ––– Gross profit X Distribution costs (X) Administrative expense (X) ––– Operating profit X Finance costs (X) ––– Profit before tax X Tax (X) ––– Profit for the period X

A typical Statement of Financial Position is shown below:

£000 Non-current assets Property, plant and equipment X Other intangible assets X Goodwill X ––– X ––– Current assets Inventories X Trade and other receivables X Cash and cash equivalents X ––– X ––– Total assets X –––

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Equity and liabilities Equity Share capital X Share premium account X Revaluation reserve X Retained earnings X ––– Total equity X ––– Non-current liabilities Bank loans X Long-term provisions X ––– X –––

Current liabilities Trade and other payables X Tax liabilities X Bank overdrafts and loans X ––– X ––– Total liabilities X

––– Total equity and liabilities X

–––

2.2 The difference between cash and profit

There are a variety of reasons why the profit of a business will not equate directly to cash:

• Revenue is recognised in the Statement of Profit or Loss when it is earned but this is not necessarily when the cash is received. A business may make credit sales thus creating receivables.

• Costs are recognised in the Statement of Profit or Loss when incurred but this is not necessarily when the cash is paid. A business may have credit with suppliers creating payables.

• Accruals are an expense that has been incurred during the period but has not been paid by the period end, so will reduce profit but will not have impacted on cash flow.

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